This report explores the managed portfolio performance of subprime auto finance companies that have outstanding subprime auto loan asset-backed securities (ABS) rated by S&P Global Ratings. These metrics differ from vintage static pool data, in that portfolio data represents a dynamic collateral pool in which losses are assigned to the period in which they occur. In contrast, with vintage static pool data, losses are assigned to the period in which the loans were originated or securitized. Given that the peak loss period for auto loans is generally about nine to 18 months after origination, during periods of rapid growth, the losses associated with newly originated loans often don't materialize in the portfolio data for a year or more. Similarly, credit tightening may not manifest in the portfolio statistics as soon as it does in the vintage static pool data.

In our analysis, we excluded AmeriCredit's performance data, given that it provides portfolio metrics on a combined (prime and subprime) basis and prime, which grew to more than 60% of its outstanding portfolio in 2015, represented 76% as of Dec. 31, 2023.

Factors Driving Managed Portfolio Deterioration

Our research on subprime auto lenders' managed portfolio performance revealed a historical pattern of rapid growth followed by performance deterioration. We believe this rapid growth, coupled with macroeconomic factors, contributed to subprime auto loan issuer's managed portfolio deterioration in 2023.

Rapid growth

In 2019 through 2022, subprime managed portfolios' total aggregate outstanding amount grew at an annual compound rate of 10% (see chart 1). Losses and delinquencies started rising in 2022 after both declined in 2020 (with losses declining further in 2021) due to COVID-19-related stimulus and higher used vehicle values and recovery rates. However, by year-end 2023, 31-plus-day delinquencies had reached a record high and losses had climbed to an eight-year high as inflation curbed affordability and recovery values normalized. Average 31-plus-day delinquencies rose to a record 13.65% as of year-end 2023. Meanwhile, net losses rose 32.00% to 8.93%, similar to the 8.81% reached in 2016 (see chart 1 and tables 1-2). In response to the weaker performance, lenders generally tightened their underwriting standards, resulting in slower aggregate managed portfolio growth.

Chart 1

A similar phenomenon occurred from 2012 through 2015 when the subprime managed portfolios' total aggregate outstanding amount grew at a 24% annual compound rate. After three years of rapid expansion in this highly competitive market, delinquencies and losses peaked in 2016 despite declining unemployment rates. Several lenders (including some large banks that didn't traditionally securitized these riskier loans) responded by scaling back their origination volumes as their focus moved to quality rather than quantity. Portfolio growth slowed in 2016 and 2017 as a result (with only 4% growth in each year), which led to a reduction in late payments in 2017 and 2018 and losses in 2017 through 2019. For instance, Santander Consumer USA Inc.'s (Santander) and Exeter Finance LLC's (Exeter) outstanding portfolios declined 5% and 3%, respectively, in 2016; and Santander's portfolio shrank an additional 5% in 2017 (see table 3). These declines led to lower losses for Exeter in 2017 and 2018 and for Santander in 2018 and 2019.

In 2023, total aggregate outstanding subprime auto loan ABS receivables rose 5% to $87.1 billion. If history repeats itself, this slower portfolio growth, which was due to lenders' increased focus on quality, should be followed by lower delinquencies and losses for the remainder of this year, assuming the U.S. economy remains healthy. Historically, when lenders tighten their credit standards, which we believe they have, beginning in mid-2022, their performance metrics improve in the following years.

In fact, as of March 31, 2024, American Credit Acceptance LLC (ACA), Bridgecrest Acceptance Corp. (Bridgecrest; formerly known as DriveTime), Global Lending Services LLC (GLS), and Exeter all posted lower year-over-year 31-plus-day delinquency levels. While Santander was the only company to report slightly lower annualized year-over-year losses for first-quarter 2024, we believe some of its peers will report a decline in managed portfolio losses later this year, given the improvement in delinquency levels. Further, it generally takes longer for better performance to materialize in managed portfolio statistics than in vintage static pool data, and we have observed slightly lower losses in the 2023 quarterly vintages than for 2022 for several subprime securitizers. (See our latest U.S. Auto Loan ABS Tracker report on www.spglobal.com for more insight into how their transactions are performing on a vintage static pool basis.)

Table 1

Table 2

Table 3

Macroeconomic factors

Inflation has also contributed to weaker consumer credit quality, with the subprime segment being affected earlier and to a greater extent than the prime segment. Relative to prime consumers, subprime obligors typically have lower incomes and spend a higher share of their incomes on basic living expenses. According to a June 2023 study by Cox Automotive, the implied consumer price inflation (CPI) in June 2022 for the two lowest income quintiles were approximately 22.0% and 12.0%, respectively, while the overall CPI was 9.1%. As such, the inflationary environment in 2022 and 2023 took a greater toll on this population, causing them to exhaust the savings they had accumulated during the pandemic at a quicker pace than higher-income consumers.

Most subprime lenders have also attributed "delinquency churning" to this inflationary environment. Previously, when vehicle prices and monthly auto loan payments were lower, consumers who fell behind in their auto payments could often bring their accounts current in subsequent months by making two or more payments. However, over the past few years monthly auto payments, insurance premiums, and rental costs have risen faster than wages, making it more difficult for delinquent auto borrowers to make multiple payments in one month in order to become current. As a result, these obligors continue to "churn" in delinquency status, causing portfolio delinquencies to increase to a greater extent than losses. Thirty-plus-day delinquencies rose 20.0% to 13.65% in 2023 from 11.4% in 2019, while losses increased only 14.0% to 8.9% from 7.8% during the same period.

The weaker performance has also been attributed to "credit score" inflation, which has resulted in credit extension to obligors who have struggled to satisfy their obligations against the economic headwinds since 2022. Some subprime lenders have cited growing levels of buy now, pay later (BNPL) debt (which generally isn't reported to the credit bureaus) and credit builder products as two factors contributing to this "credit score" inflation. The normalization of wholesale vehicle values from elevated levels is also fueling the severity of losses. Higher interest rates are another contributing factor, given that subprime borrowers tend to carry balances on revolving debt, including credit cards, which have seen automatic rate increases.

What's Next?

As we look forward to the rest of the year and 2025, we will continue to monitor the impact economic and market factors have on subprime auto loan performance. On a macro level, we monitor unemployment levels, given the established correlation between increases in unemployment and losses. We also watch wage growth, inflation rates, and origination volumes industrywide and on an issuer basis. According to the NY Federal Consumer Credit Panel, industry subprime (credit score of less than 620) auto loan originations rose 5% year over year to $56.2 billion in the first half of 2024 after declining 12% to $106.8 billion in 2023 (see chart 2). This renewed growth is potentially a risk. However, the Fed's data measures overall subprime originations, including that of the banks and other entities that don't securitize. Additionally, some of the lenders whose transactions we rate have expanded by moving into higher quality near prime and nonprime segments.

Chart 2

On a micro level, we focus on lenders' payment-to-income levels because these may, in some cases, be a better barometer of borrowers' credit quality and ability to pay than credit bureau-only scores. We also analyze the degree of risk layering, which exists to the extent that lenders structure longer term loans with high loan-to-value ratios to weaker obligors. When examining historical performance, we discount the issuers' strong performance during the 2020-2021 pandemic years, focusing instead on their more recent performance. Additionally, we have observed that the 2022 securitized pools experienced a greater share of losses in the second year versus the first year. As such, we remain judicious when revisiting our expected cumulative net loss levels and considering upgrades on rated classes that have only 12-18 months of performance data.

The authors would like to thank Sophie Galperin, summer intern, for her help in aggregating the data.